Identify the different categories of market-based instruments and what are the pros and cons?

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Expert Solution

The instruments that regulate behavior through market signals rather than using command and control are referred to as market based instruments. The market based instruments are of three types:

1. Price Based - These include user charges, emission charges, product charges, performance bonds, non compliance fees, subsidies , deposit refund system etc.

2. Rights Based - Tradeable permits, rights or quotas , offset schemes etc.

3. Market friction based instruments- These include education programs, research programs, labeling etc.

Market based instruments provide great flexibility and financial incentives to companies as compared to command system where companies loses motivation.This encourages producers to adopt new technologies and facilities to pursue better results to solve various environmental problems.

However, some of the disadvantages of using market based instruments include need of principles and regulations to guarantee its implementation but relevant values are not sufficient. Also some companies might not be motivated to take actions in the direction of innovation and thus market based instruments loses its relevance.

Rahul Sunny answered 1 year ago

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